The pocket of the economy that has really pushed forward this year is that of technology stocks; with plenty of firms pushing past expectations on development and financial metrics, some names have earned their pound of flesh from investors.
You can look at the Technology Select Sector SPDR Fund (NYSEARCA: XLK) to gauge the momentum in this industry today. When pegged against the S&P 500 year-to-date, the gap widens to a 30.4% outperformance. But now that the VIX is below 13.0%, its lowest level since 2019, you must be more selective about which tech stocks you back.
So look, there is an apparent discrepancy between Abode (NASDAQ: ADBE) and Salesforce (NYSE: CRM) sticking out like a sore thumb, that is, to savvy investors like yourself who are diligent enough to spot it. The undeniable evidence will help you steer toward the right stock to watch this year’s end.
Tune out the noise
It is easy to get drawn in by stock charts that only go up, and when it comes to the computer software industry, that’s all that large capitalization stocks like Adobe and Salesforce seem to be doing. In fact, when taken on average, the industry trades at 98.8% of its 52-week highs.
You must tune out the temptation to project these paths moving forward, as there are a lot of falling knives in the space, so leave others to try to catch them. This situation calls for a deeper analysis, and it is coming right up.
As a first stop, you could check with the people that get paid to study these businesses every day, project their financials, and take into consideration any possible scenario, all to deliver Main Street an average valuation range for said business. Analysts!
Abode price targets to land on a consensus of $603.2 a share, which implies a 3.2% downside from where the stock trades today, which is not a great start. Considering the stock is near its all-time high prices, this change in sentiment can become extremely dangerous before you know it.
Salesforce is marching to a different tune, perhaps riding on the increasing wave of companies opting for a hybrid or even fully remote work model, spiking the demand for the software beyond belief. Here, analysts have agreed to slap a $24.4 a share price target, reflecting an 8.2% upside from today.
Get technical
Beyond the price action and analyst sentiment, there are other measures that you can look at to come up with a proper explanation of where a stock may be headed and its justification.
The two measures you need to create this view are Forward price-to-earnings ratios and the projected EPS growth for the next twelve months. The premise is basic: how much are markets willing to pay today for the potential future growth of earnings?
Taking the industry as a whole, it carries an average forward P/E of 30.6x and an expected EPS growth of 13.3% in the next twelve months. Knowing what you know now, it is time to place Abode and Salesforce against this benchmark to find out where they stand in the eyes of the market.
Abode trades at a much more expensive 34.9x ratio when it stands next to Salesforce, whose stock can be bought today for a much more reasonable 24.0x, which also happens to be at a 21.4% discount to the sector average.
Now, bears would be in their uncommon right mind to say, “Yeah, but it must be cheap for a reason.” in this case, they would be wrong. Adobe analysts are projecting a 12.1% EPS advance for the next twelve months, barely meeting the industry’s 13.3% average.
Salesforce, the cheaper stock in this example, has analysts falling in love with a 21.1% projected EPS advance for next year. This is above Adobe’s growth rate and 20.0% above the industry average growth rate.
So here’s the deal: Salesforce is looking to grow its earnings at one of the highest rates in the internet software industry, yet it is trading at a 21.4% discount to peers?
Yeah, that makes no sense, and this is one of those opportunities where you can take advantage of everyone else having a big old party while you scheme your next wealth-building move.
